Policy, law and administrative considerations of Indirect Tax

The Customs and Excise Management Act (CEMA), the regulatory framework for the management and collection of duties was enacted in 1958. Since then, the only major amendment to CEMA was in 2003, in view of the need to adopt the World Trade Organization’s Agreement on the implementation of Article VII of the General Agreement on Tariff and Trade (Customs Valuation). Baring that amendment, CEMA which underpins the management and collection of duties, is stale and largely inconsistent with current business realities.

To address this challenge, the Nigeria Customs Service (NCS) moved to repeal the old legislation and re-enact a new one that is more reflective of the current business climate. This move has taken several years with stakeholders pushing and shoving on what gets included and what does not. The old Regulations had remained in force but with policy revisions that often flip flop, less transparent than desirable and inconsistently applied. This goes on to defeat the purpose of certainty and predictability in business.

The above has made several businesses pull back from doing business in Nigeria, switch to the informal channels or move to beat the system even when the formal trade channels are employed.

Perhaps the most prevalent way enterprises using formal trade channels beat the system is vide valuation. Essentially, when goods are undervalued and NCS is unable to identify this anomaly, duties slip through. Sadly, the weak handshake between the NCS and other regulatory agencies – especially the Federal Inland Revenue Service (FIRS), and the lack of robust country data, does not help unmask enterprises who engage in these practices.

•Administration

The World Bank recently released its 2017 doing business publication and therein ranked Nigeria an appalling 169 out of 190 countries. A deep dive into the numbers show some very worrying statistic on trade. The country ranked 181 out of 190 countries on the metrics – ‘trading across borders’.

Nigeria has remained one of the most unattractive countries to trade with, beating only Cameroon, Sudan, Congo Republic, Liberia, Angola, Venezuela, Eritrea and Congo Democratic Republic in the rankings. Specifically, it takes an estimated 266.8 hours to export one consignment of goods (comparable data for OECD  high income bracket and sub-Saharan countries is 15 hours and 192 hours respectively) and 456.4 hours to import one consignment of goods (comparable data for OECD high income bracket and sub-Saharan countries is 13 hours and 246 hours respectively).

Reports out of the industry shows that this statistic is caused by two main reasons:

•Regulatory red tape: Traders have to deal with multiple government agencies to either import or export goods. Based on industry reports there are over ten government agencies at the ports. This is inconsistent with best practice.

•Unofficial taxation: Formal channels of clearing goods through the borders are replete with informal practices including payment of unofficial fees.

Generally, research shows that increased obstacles to formal trade creates informal trade channels and consequently illegal trade flows. These illegal trade flows lead to tax leakages and perhaps the bigger problem of grey records. Expectedly, the biggest culprits are the small and medium sized companies who do not have the resources to overcome these trade barriers. This perhaps explains why smuggling is rife, with many arguing that there are more informal than formal trade channels in the country.

Remedies

•Review regulatory framework

This is perhaps the most obvious remedy to improving efficiency in the system and ramping up revenue generation. There needs to be clear rules on how a business would be treated when trading with Nigeria. New rules must amongst other things:

• provide clear processes for rulings, appeals and dispute resolution;

•impose fees and penalties which reflect current realities, ensuring that measures are put in place to deter infractions;

• create a system for post clearance audits which ensures the NCS reviews the books of traders to ensure consistency between import declarations and financial records;

•Provide clear provisions around fiscal policies and incentives e.g. deferred payment provisions, refunds, duty drawbacks etc.

The informal sector cannot be ignored as they constitute a significant part of the trading community. There should therefore be rules that simplify trading procedures for this group in a way that ensures border protection and encourages the shift from informal to the formal trading channels.

•Streamline agencies at the borders

It is imperative that the number of agencies at the ports are reduced to remove red tape. This can be done by setting up a joint unit whose mandate would be to ensure the objectives of each individual agency is checked at a one-stop shop. This increases efficiency of trade and reduces the opportunity for unofficial taxation.

•Improving infrastructure

Businesses cite infrastructural challenges as some reasons for not trading with Nigeria. The most obvious challenges are the availability of scalable ports at strategic trading hubs, scanning machines for risk assessment and security screenings, alternative transportation network in and out of the ports etc. It is imperative that the country makes significant investment in trading infrastructure to ensure efficient cross border trade.

Conclusion

Statistics indicate that a significant amount of goods consumed locally are imported, dutiable but sourced through informal channels. Trade specialists are therefore convinced that there is huge revenue potential in the customs space and the time to mine these resources has never been more auspicious, especially when the Nigerian dream is to produce, consume and export ‘Made in Nigeria’ products. However, trade must be liberalized if custom duties is to be used to re-engineer economic growth.

YOMI OLUGBENRO